Head of FX Strategy
Summary: Sterling surged higher as certainty that a no-deal scenario will be avoided rises sharply on UK Prime Minister May’s latest moves. Meanwhile, USD traders are struggling to find a pulse after Powell testimony failed to excite trading interest.
Powell’s semi-annual testimony before a Senate panel yesterday failed to inspire much interest, although the USD wakes up a hair weaker this morning than this time yesterday, perhaps in part on heavy GBPUSD flows inspired by sterling buying. Projections for the Fed policy rate dropped about a single basis point in the wake of Powell’s testimony and the Q&A as Powell has no real reason to send fresh signals other than “patience” now that markets and financial conditions have stabilised so thoroughly from the meltdown late last year. Equities ended the day slightly lower.
Sterling surged above resistance across the board on what appears a more decisive clearing away of no-deal Brexit risks, with the menu of options seemingly shrinking to either an approval of May’s deal (in a vote on March 12), another extension for further negotiation (on March 13), and even rising odds of a second referendum that would allow the UK to change its mind after opposition Labour leader Jeremy Corbyn voiced support for the referendum option if Labour’s preferred Brexit terms are not on offer (and they won’t be).
A useful Bloomberg article runs down the dates of the final weeks before the original Article 50 deadline of March 29. The FT’s Martin Wolf wrote yesterday (paywall ) that a second referendum is “now essential”. I had long thought that a second vote was not likely, but am now far less convinced. The chief difficulty is that no one really wants May’s deal – Brexiters would prefer a no-deal and Remainers want things to go back to the way they were.
Trading interest
GBP longs via GBPUSD and GBPCHF with stops below 1.3150 for both (trading at the same level because USDCHF at parity….) with a view 200+ pips higher.
USDCAD long idea struggling for air and risks a stopout. Fresh longs may consider stops a bit below 1.3100.
EURJPY shorts still in view with stops above 126.30, adding on a close below 125.50 and looking for a go at 124.00 support initially.
USDJPY looks a tactical shorts on upticks with stops well clear of 111.00 for a try below 110.00
Chart: GBPUSD
The latest developments make it clearer than ever that no-deal risks are fading fast and sterling has sprung to attention, clearing resistance levels virtually across the board. In GBPUSD, the clearing of the 1.3200 area could point to 1.3500 or higher – as sterling longs may be less reluctant to reprice sterling even if May’s deal heads for a vote failure in two weeks on the assumption that this could raise the prospects of a full Brexit reversal down the road via a second referendum.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
